How Low Can Jobless Claims Go?

The number of people filing new claims for unemployment benefits fell to 289,000 last week, the second-lowest level of the year. Over the past four weeks the average for claims was 293,500. To put this in perspective, during their worst week of the recession in March 2009 claims were 665,000.

While other indicators of labor-market strength have yet to completely return to normal, the level of jobless claims is not only the lowest of the recovery, but it’s near some of the lowest levels of previous (and much stronger) recoveries as well.

The two longest stretches of economic growth in the last half century were the booms in the 1980s and 1990s. And jobless claims today are now near the lowest levels reached in those historic expansions.

Jobless claims can often be distorted around this time of year due to the patterns in which auto makers temporarily lay off workers while retooling their factories.The Labor Department, however, said no such patterns were distorting the numbers this week.

Whatever the case with seasonal adjustment patterns, “the data serve to reinforce the key point here, which is that the underlying trend in claims is declining steadily,” said Ian Shepherdson, the chief economist of Pantheon Macroeconomics, in a note analyzing the report.

In fact, two weeks ago, jobless claims fell even lower than their best week during the 1980s. The level is only slightly above that reached in the 1990s. And another year of declining claims would put the low mark of the 1970s within reach.

This means the data for jobless claims are out of sync with other labor market data. The unemployment rate of 6.2% is still well above the 5% rate reached in the 1980s and few economists believe the economy is even capable of sustaining the 3.8% unemployment rate reached in early 2000 at the end of the 1990s tech boom.

The decline in jobless claims is even more striking when the size of the workforce is taken into account. For most of the late 1980s the U.S. had under 100 million workers covered by the unemployment insurance program. Today, it’s more than 130 million. Unlike unemployment, which is a share of the workforce, jobless claims are a raw number, unadjusted for the growing workforce.

When the economy’s growing size is taken into account, jobless claims are not just at the lowest level of the year, or the lowest of the recovery. They’re near the lowest on record. By this measure, a further decline in jobless claims would put the U.S. labor market in truly uncharted territory. (The Labor Department’s data doesn’t provide the level of covered employment for the 1960s, but it’s clear from the size of the population that the percentage of claims was much higher then than today.)

Skyrocketing jobless claims are clearly a sign of distress, and one of the clearest signs of recession. But it’s not at all clear that today’s low level of claims is healthy either. After all, unemployment is still not back to normal, part-time unemployment is very high and economic growth is fairly weak. Rather, the historically low level of claims may reflect a different trend we’ve been tracking on Real Time Economics: the decline in labor market dynamism.

The U.S. economy has long been characterized by its churn, with millions of Americans leaving one job and getting hired for a new one every month. It’s better when people voluntarily quit jobs than when they get laid off, but in a healthy and dynamic labor market, people experiencing either type of job separation can quickly get hired for new work.

That turnover is not recovering. Neither hiring nor quitting are back to their pre-recession levels. And initial jobless claims appears to be another indicator that the U.S. labor market is simply less dynamic than in the past.

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